Taxpayers with simple returns have several new ways to file without having to pay for help.
The average cost for having an accountant prepare a Form 1040 with a Schedule A and a state tax return was $233 in 2011, up 1.7% from 2009, according to the National Society of Accountants. But the options for free tax help are growing. The Internal Revenue Service, for instance, offers Free File, a program that offers free tax-preparation software and other tools for taxpayers with low and moderate-income. Through the IRS site, taxpayers who make $57,000 or less can answer a few questions about their income, location and whether they qualify for certain credits to pull up a list of companies that offers free tax preparation software, including TaxSlayer, H&R Block and 1040.com. The IRS also offers Fillable Forms, electronic versions of IRS tax forms, for people who are comfortable calculating their own taxes.
Wouldn’t it be nice to write off that flight to Hawaii? Or what about the champagne-and-caviar-adorned soirée at Carnegie Hall? Maybe you can, says Doug Stives, a CPA from Red Bank, N.J., who re-engineered his life in 2006 to become the Most Tax-Efficient Man in America, as Tax Report columnist Laura Saunders writes. Stives shared a couple of practical, tax-saving suggestions with SmartMoney.com.
Get on someone’s payroll. Stives had been a partner at an accounting group for nearly four decades when he decided to take on a role as a tax and accounting professor at Monmouth University in central New Jersey. He also started his own consulting business on the side. While his paycheck is now 25% lower than it had been, his take home is nearly 90% as much, says Saunders. Stives estimates that the fringe benefits from working at the university – health insurance, disability insurance, life insurance, pension-plan coverage, unemployment coverage and workmen’s compensation coverage, among others – add up to about $40,000 a year.
Mix business and pleasure. Usually it’s a No. 1 professional no-no. But combining your work life with your personal life can slim the price tag of otherwise expensive vacations. As a part-time consultant and full-time teacher, Stives travels a considerable amount for seminars and teaching gigs, often to alluring vacation spots like Hawaii and Lake Tahoe. To deduct airfare, you need to spend more than half your working days on business, says Stives. Weekends don’t count, nor do travel days. If Stives leaves for Hawaii on a Friday, works three days mid-week and returns home the following Monday, he’s squeezed a mostly tax deductible 11-day trip out of three working days. (Hotels, meals, and rental cars are only partly deductible.) But make sure you don’t get carried away, he says. It’s a good idea to pay in full for at least some trips you take to show the IRS you don’t deduct everything.
In our sister blog, WSJ.com’s In Charge, Sarah E. Needleman asks: Which member of “The Beatles” would make the best accountant?
The answer is Paul McCartney, according to a fall survey by Intuit Inc. A publicist for the company alerted Needleman to the survey–which polled 1,217 small businesses and 1,200 accountants–after reading her blog post about a forthcoming book on business lessons that entrepreneurs can learn from the Fab Four. Needleman writes: Paul McCartney won the majority of votes, with 50% of the small businesses and 53% of accounting professionals choosing the singer and guitarist. George Harrison came in second with 22% and 24% of the votes, respectively. Ringo Starr followed with 15% and 12%. John Lennon received the least votes: 14% from small businesses and 11% from accounting professionals.
A couple of years ago, I had to face reality and file my first post college tax return.
No longer privy to the substantial discounts major tax preparation companies offer to college students, I hunted for the cheapest way to file my taxes without jeopardizing my refund. An uncle suggested someone who would handle all of my forms for a $50 flat fee. The previous year, I had worked in four states, lived in three and graduated from college, so I knew my tax return wasn’t going to be simple. I hadn’t made too much money between my internships and part time job so I wanted to avoid the nearly $200 fee quoted to me over the phone for my complicated tax return.
The $50 price was right, but I should’ve known something was up right away. After waiting nearly two hours, the preparer ignored my questions, was insulted when I questioned her credentials and got me to sign forms without carefully reading them. My mistake, but she had come recommended.
My uncle later admitted he had some qualms. He was skeptical because she had never fully explained the deductions she was filing on his behalf, but he didn’t know how to check her credentials. He also couldn’t find someone offering such an attractive price. Unfortunately, in this case cheaper wasn’t better.
My uncle visited her office about three weeks after my appointment because she wouldn’t return calls. But her office was locked and someone at a neighboring business told my uncle our preparer had been arrested for allegedly funneling a client’s tax refund to her own account. She also ran a money wiring business on the side, and was allegedly wiring some of those funds into her personal accounts as well. When I heard the news, I immediately called the help line for the Internal Revenue Service. Fortunately, it had received my forms and sent me a copy.
There’s never a shortage of Justice Department news detailing indictments against tax-return preparers who make false claims on tax returns. Just this month the agency pointed to a long list of preparers who fraudulently claimed the home-buyer tax credit on taxpayers’ returns.
So, what do all these scams and frauds mean for the taxpayers involved? It’ll vary depending on the specific situation, but tax penalties and interest are likely — and a major headache is a certainty. To avoid that expensive headache, as I wrote at MarketWatch.com, the key is to vet your tax preparer, and check your return before you sign it. Yes, it’s drudgery, but you’re ultimately responsible in most cases.
While in certain situations a taxpayer may be able to convince the IRS and Justice Department that he wasn’t at fault – that the preparer committed the fraud without the taxpayer’s knowledge – it’s a tough case to make. And even if you’re successful, you’ll owe the back taxes. That’s never a fun surprise.
Unfortunately, it’s not always easy to vet preparers to find a trustworthy pro. When it comes to professional standards, the world of tax preparation is a work in progress. While certified public accountants and enrolled agents are subject to relatively high standards including competency tests and continuing-education requirements — CPAs are governed by state boards of accountancy and EAs by the IRS — there are a slew of people who, every tax season, simply hang out a shingle and get to work crunching the numbers on Forms 1040. And while it’s fairly easy to find out whether a CPA or EA has been censured (more on that below), that’s not the case for paid preparers who don’t have a designation.
Jackson Hewitt and H&R Block are taking their rivalry to the courtroom. The No. 2 tax preparer filed a suit against its much-larger rival, alleging H&R Block is disseminating false and deceptive advertising. Jackson Hewitt also seeks an injunction barring H&R Block from continuing to run the ads, according to the complaint.
The issue: Oh, just an ad claiming that two-out-of-three Jackson Hewitt customers who’ve had their returns looked over by H&R Block were entitled to bigger refunds, if only their Jackson Hewitt preparer had been more careful or competent.
“We intend to pursue every avenue available to us to stop their campaign of misinformation,” says Jackson Hewitt chief executive Philip Sanford.
As tax season kicks off, tax preparers have started armoring themselves for turf wars over a dwindling number of customers. Tax software has made online filing much more user-friendly, and the weak economy left many taxpayers feeling like they don’t necessarily need to shell out the cash for a professional. Both Jackson Hewitt and H&R Block have seen revenues take a thrashing in recent quarters.
Jackson Hewitt hopes to sweep up some of the crumbs by offering a product H&R Block can’t: refund-anticipation loans. RALs give customers the option to pay a sizeable fee to get on-the-spot refunds of up to $1,500. As The Tax Blog previously reported, regulators recently barred H&R Block’s bank from backing the highly controversial loans, whereas the FDIC, which governs the bank backing Jackson Hewitt’s loans, hasn’t made the same determination. So, Hewitt gets a green light on RALs for now.
In a recent post about the new estate tax rules, one reader commented: “Well if this accountant was this ladies tax preparer early in her career she should darn well know where every bit of paper is regarding each share.” After all, this reader said, his accountant has records going back “to the beginning of time” regarding his asset purchases.
I smiled when I read that, visualizing my 20-something self, having been 80+ year Mildred’s accountant since she was a young housewife. In fact, I never met Mildred. It was Ruth, her younger sister (who was 70-ish), who took over as Mildred’s guardian and hired me to catch up on several years of unfiled tax returns. However, it was early in my career, I became aware of the basis nightmare that many people face.
Let me give you 10 reasons why your accountant might not have your records:
1. It’s not unusual for a tax professional to start working with an elderly person for the first time after the person has been incapacitated. By that time, the client might be unable to participate in the tax preparation and planning process.
2. One spouse handled all the finances. The other spouse knew nothing about the details – and never found the records.
The Tax Blog brings together a team of award-winning tax journalists from the Dow Jones network and around the web to examine the tax issues, changes and legislation that affect families, investors and small business owners. Our contributors include Tax Report columnist Laura Saunders (WSJ), Tax Guy columnist Bill Bischoff and senior reporter Jilian Mincer (SmartMoney.com), retirement-focused reporter Anne Tergesen (WSJ), wealth management writer Arden Dale (Dow Jones Newswires), TaxWatch columnist Eva Rosenberg and personal finance reporter Andrea Coombes (MarketWatch), and reporter Alyssa Abkowitz (SmartMoney). They’ll provide the latest news and insight, mine the tax code for tips and loopholes, and answer your questions about tricky tax situations. Contact the The Tax Blog with ideas, suggestions or tax questions at email@example.com.